Are Best GBP to EUR Exchange Rates Ahead? | Underlying Pound to Euro Exchange Rate Trends & News

August 27, 2017 - Written by Ben Hughes

STORY LINK Are Best GBP to EUR Exchange Rates Ahead? | Underlying Pound to Euro Exchange Rate Trends & News

"Overall though, the underlying [EUR/GBP] trend at the moment remains up with the "flash-crash" highs in the 0.9400-0.9700 region the next main upper levels." Lloyds FX Strategy, August 25

It has been another disappointing week for the Pound to Euro exchange rate, which fell to a fresh eight-year low on Wednesday.

Foreign exchange strategists at Deutsche Bank however are warning that, in the near-term at least, the GBP/EUR could climb from these lows:

"The potential for more hawkish rhetoric from the Bank of England, rising political noise in September and stretched technical indicators warrant some near-term caution, so we tactically take profit on our long EUR/GBP recommendation from the May Blueprint."

However, the analysts do confirm the medium to long term pound sterling outlook remains bleak:

"Big picture, a weak flow picture and little possibility of Brexit resolution before year-end means that we remain structurally bearish on GBP."

Confidence in the outlook of the UK economy remains generally muted, particularly as the second quarter gross domestic product data pointed towards a stagnation in business investment and weakening consumer spending.

While markets did welcome comments from UK Foreign Secretary Boris Johnson, as he acknowledged that the UK will have to meet its obligations and pay its EU divorce bill, this was not enough to substantially boost the Pound.

Brexit Volatility to Dominate GBP EUR Exchange Rate Outlook

As the latest round of Brexit negotiations get under way this week the Pound is likely to come under further pressure.

There are concerns that the UK and EU are no closer to achieving an agreement on any of the major issues involved in the matter, particularly as the sequencing of talks remains a point of contention.

While the Conservative government has shown signs of softening its approach to Brexit this has yet to convince EU officials, or investors.

Even so, analysts at ING commented:

‘Progress on securing a transition deal - with both sides providing strong assurances - should help to ease any significant GBP downside bias. However, for this to serve as a catalyst for a rebound in the currency, we would need to see evidence that a reduction in economic uncertainty is in fact spurring a rebound in investment activity. This is what would give the Bank of England (BoE) greater confidence to begin normalising monetary policy - which would undoubtedly be a positive GBP development.’

However, if the two sides remain at odds this is likely to return the GBP EUR exchange rate to a sharper downtrend.

Volatility for the Pound could also be in store on the back of the latest UK mortgage approvals and consumer credit figures.

Investors will be hoping to see some signs that confidence within the domestic economy is still holding up, in spite of the persistent sense of uncertainty clouding the outlook.

A fresh uptick in consumer credit could provoke jitters for Sterling, though, given the Bank of England’s (BoE) worries over the high levels of consumer borrowing.

If the GfK UK consumer confidence survey also points towards a deterioration in domestic sentiment the GBP EUR exchange rate is likely to remain under pressure.

Rising German Inflation Could Bolster ECB Tapering Bets

Demand for the Euro could strengthen further in the coming week, providing that the latest domestic data paints a more encouraging picture of the Eurozone economy.

Forecasts point towards a modest uptick in the GfK German consumer confidence index, which may help to bolster optimism in the ongoing health of the Eurozone’s main growth engine.

However, if the confidence measure follows in the footsteps of the ZEW and IFO economic sentiment surveys this could dent the appeal of the single currency.

Greater focus will fall on August’s German consumer price index, though, as investors are keen to get a fresh gauge on inflationary pressure within the currency union.

If inflation edges higher on either the month or the year this could weigh heavily on the GBP EUR exchange rate, increasing the likelihood of the European Central Bank (ECB) beginning to taper its quantitative easing program sooner rather than later.

Any disappointment could encourage a fresh wave of Euro selling, on the other hand.

Even so, the downside potential of EUR exchange rates may be somewhat limited as Kit Juckes, Chief Global FX Strategist at Societe Generale, noted:

‘Valuation is probably the biggest source of support for the Euro. The 2015-2017 period has seen it trade far below any form of ‘fair value’ thanks to the ECB’s magic cocktail of negative rates and asset purchases. Those drove interest rate differentials to levels which discouraged foreign investment in the Euro, while at the same time crowding investors out of European bond markets. The mere idea of policy normalisation has been enough for a forward-looking market to start taking the currency back towards those fair value levels.’

So long as investors see increased hopes of the ECB moving towards a more hawkish bias the GBP EUR exchange rate could be in danger of testing fresh lows.

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